The home health care workforce shortage is restricting PE dealmaking, experts suggest.
That’s especially been the case over the last year and a half, as micro and macro economic headwinds have also affected both agencies and PE firms.
“When you think about it, it takes the margin on a business that was already feeling some reimbursement pressure and just compresses that,” Rebecca Springer, senior health care analyst at Pitchbook, told Home Health Care News. “In this environment, the operational quality of the teams that are in place that are able to upscale their workforce, rotate and attract new staff – some of those basic things that are needed to do good business – becomes a really big differentiator in this climate.”
In recent years, the decreasing pool of workers has touched nearly every aspect of health care services.
Home health agencies, however, were among those hit the hardest, according to Pitchbook’s PE-focused Healthcare Services Report. Staffing pressures have forced many home health and behavioral health businesses to “slow their growth considerably despite seemingly limitless demand.”
In response to that, PE firms may also opt for elongated holds on the investments they have made to avoid selling at depressed valuations.
“In the past, you could get away with a little bit more staffing churn,” Springer said. “Because the cost is lower [for home-based care], you had the ability to grow a platform faster because you had more free cash flow as a result of that higher margin. Interest rates were lower so you could get that financing more easily. Now I think you’ll see platforms grow more slowly and see some distress out there as a result of all of this.”
It’s clear now that 2021 was an outlier for M&A in home-based care. In that year, there were at least 166 home health, home care and hospice deals. In the following years, volume has declined.
But that also offers somewhat of an opportunity for PE players.
“If there are 100 bids on an asset, it’s tough to become the partner of choice,” Donnacha O’Sullivan, principal at the PE firm TT Capital Partners, told HHCN. “When people are not as focused on making an investment in home health, it just becomes easier for us to become that partner [of choice].”
The Bloomington, Minnesota-based TT Capital Partners is a health care-focused PE firm. Most recently, it made an investment in the King of Prussia, Pennsylvania-based InHome Therapy, which is one of a few home-based care investments it has made.
‘Is what it is’
Uncertainty surrounding home health reimbursement was to blame for dealmaking “grinding to a halt” over time, Springer said.
However, when the U.S. Centers for Medicare & Medicaid Services (CMS) came out with a better-than-expected final rule for CY2023, Springer expected deals to pick up.
That didn’t happen. But there’s optimism that small- and medium-sized deals will make up a considerable amount of PE-backed deals moving forward.
“The staffing landscape is what it is,” Springer said. “I’m sure there are a fair number of small home health and hospice operators that would be interested in a sale given that they’re feeling the pressures that are in the market. I am certain that you have some assets out there that are in negative margin territory — and some that have lower margins than they would like — at the same time as they’re experiencing staffing costs. If you’re heavily leveraged, your debt service costs are increasing dramatically right now as a result of interest rates.”
Although staffing is a factor to consider with these recent trends, it’s not the only one.
“I think it’s a factor, but I don’t think it’s the factor,” Les Levinson, co-chair of the transactional health care practice Robinson & Cole LLP, told HHCN. “You have an economy that’s definitely on a different trajectory than it was a couple of years ago. Interest rates are higher. That’s all on top of this labor shortage that has been going on for quite some time.”
Although it’s difficult to quantify how impactful staffing shortages have been on PE activity, it is no doubt on the minds of investors when they think about their ultimate goal.
“If you’re an investor, you want a path to growth,” Levinson said. “The path to growth means, in part, that you also have to be able to staff cases. If you can’t staff those cases then you’re not going to be able to market to your traditional referral sources, to Medicare Advantage plans and other providers. It has a definite impact on growth.”
For these reasons, Springer believes that care models that naturally sidestep the staffing crunch will see heightened interest from PE firms moving forward.
Self-directed care enablers, which facilitate Medicaid waiver payments to individuals caring for their family members, saw significant investor interest in 2022, Pitchbook reported.
Springer also pointed to InTandem Capital Partners’ acquisition of HouseWorks as a unique home-based care deal. HouseWorks deals in private-duty in-home care, meaning the agency can pass up to 100% of staffing-cost inflation on to their customers, depending on their positioning in the local market.
Caregiver burnout has played a factor in all of this as well, Springer said. This is a new normal for everyone involved.
The ones who adapt on the fly will be the successful ones.
“The health care industry has been fundamentally changed by COVID,” Springer said. “A lot of people have permanently left the industry because — understandably — they were completely burnt out. So I think the groups that learn how to staff efficiently and to really take care of their staff and maximize that, those lessons are hopefully going to be applied more broadly in the industry going forward.”
Private equity firms are still bullish on home-based care because they see the long-term benefits.
If quality care is being delivered, then the market will respond accordingly.
“I think you have to have a long-term belief in any of these particular investments,” O’Sullivan said. “I think we’ll be making home health and hospice investments three years from now, 10 years from now, 20 years from now. If so, then we’ll always be on the lookout for a really good care delivery business.”
Despite some of these negative factors affecting the market, Levinson is also optimistic about activity moving forward.
“I still think that the space is attractive, dynamic and interesting to private equity investors,” he said. “I don’t see them walking away from the space and going, ‘Look, we can’t staff these cases so we’re just not going to invest here.’ [Investors] just have to think harder about how they’re going to be able to grow in an environment where staffing and retention is still a major challenge.”
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